N.

GREGORY MANKIW
PRINCIPLES OF

ECONOMICS
Eight Edition

CHAPTER Unemployment
28
PowerPoint Slides prepared by:
V. Andreea CHIRITESCU
Eastern Illinois University
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 1
management system for classroom use.
 Identifying Unemployment, Part 1
• Employed
– Those who worked
• Paid employees
• In their own business
• Unpaid workers in a family member’s
business
– Full-time and part-time workers
– Temporarily absent
• Vacation, illness, bad weather

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 2
management system for classroom use.
 Identifying Unemployment, Part 2
• Unemployed
– Those who were not employed
• Available for work
• Tried to find employment during the previous
four weeks
– Those waiting to be recalled to a job
• Laid off

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 3
management system for classroom use.
 Identifying Unemployment, Part 3
• Not in the labor force
– Not employed and not unemployed
– Full-time students
– Homemakers
– Retirees

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 4
management system for classroom use.
 Figure 1 The Breakdown of the Population in
January 2016

The Bureau of Labor Statistics

divides the adult population
into three categories:
employed, unemployed, and
not in the labor force.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 5
management system for classroom use.
 Identifying Unemployment, Part 4
• Labor
  force
• Total number of workers, employed and
unemployed
= Number of employed + Number of unemployed
• Unemployment rate
– Percentage of labor force that is unemployed

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 6
management system for classroom use.
 Identifying Unemployment, Part 5
•  Labor-force participation rate
– Percentage of the total adult population that
is in the labor force
– Fraction of the population that has chosen
to participate in the labor market

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 7
management system for classroom use.
 Table 1 The Labor-Market Experiences of Various
Demographic Groups
Unemployment Labor Force
Demographic Group Rate Participation Rate
Adults of Prime Working Age (ages 25 to 54) empty cell empty cell
White, male 4.4% 89.40%
White, female 4.6 74.3
Black, male 10.1 80.7
Black, female 9.1 75.8
Teenagers (ages 16 to 19) empty cell empty cell
White, male 19.2 35.6
White, female 15.5 36.8
Black, male 36.5 25.9
Black, female 29.7 28.4

This table shows the unemployment rate and the labor-force participation rate of various
groups in the U.S. population for 2014.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 8
management system for classroom use.
 Identifying Unemployment, Part 6
• Labor-market experiences
– Women of prime working age (25 to 54
years old)
• Lower rates of labor-force participation than
men
– Once in the labor force
• Men and women – similar rates of
unemployment

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 9
management system for classroom use.
 Identifying Unemployment, Part 7
• Labor-market experiences
– Blacks of prime working age
• Similar rates of labor-force participation as
prime-age whites
• Much higher rates of unemployment
– Teenagers
• Lower rates of labor-force participation
• Much higher rates of unemployment than
older workers

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 10
management system for classroom use.
 Figure 2 Unemployment Rate since 1960

This graph uses annual data on the U.S. unemployment rate to show the percentage of the
labor force without a job. The natural rate of unemployment is the normal level of
unemployment around which the unemployment rate fluctuates.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 11
management system for classroom use.
 Identifying Unemployment, Part 8

• Natural rate of unemployment

– Normal rate of unemployment around
which the unemployment rate fluctuates
– 4.9% in 2015 (close to the actual
unemployment rate of 5.3%)
• Cyclical unemployment
– Deviation of unemployment from its
natural rate

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 12
management system for classroom use.
 Labor-force participation of men and women
in the U.S. economy, Part 1
• Women’s role in American society
– Changed dramatically over the past
century
– New technologies
• Reduced the amount of time required to
complete routine household tasks
– Improved birth control
• Reduced the number of children born to the
typical family
– Changing political and social attitudes
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 13
management system for classroom use.
 Figure 3 Labor-Force Participation Rates for Men
and Women since 1950

This figure shows the percentage of adult men and women who are members of the labor force.
It shows that, over the past 60 years, women have entered the labor force and men have left it.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 14
management system for classroom use.
 Labor-force participation of men and women
in the U.S. economy, Part 2
Data on labor-force participation
• 1950 – difference between participation
rates
– 33% of women were working or looking
for work
– 87% of men were working or looking for
work

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 15
management system for classroom use.
 Labor-force participation of men and women
in the U.S. economy, Part 3
• 2015 – difference between participation
rates
– 57% of women were working or looking
for work
– 69% of men were working or looking for
work

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 16
management system for classroom use.
 Labor-force participation of men and women
in the U.S. economy, Part 4
• Fall in men’s labor-force participation
– Young men stay in school longer
– Older men retire earlier and live longer
– With more women employed
• More fathers now stay at home to raise their
children
• Counted as being out of the labor force
– Full-time students, retirees
– Stay-at-home dads
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 17
management system for classroom use.
 Identifying Unemployment, Part 9
• Official unemployment rate
– Useful
– Imperfect measure of joblessness
• Movements into and out of the labor force
– Common
– More than one-third of unemployed
• Recent entrants into the labor force

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 18
management system for classroom use.
 Identifying Unemployment, Part 10
• Unemployment
– Not all unemployment ends with the job
seeker finding a job
• Half of all spells of unemployment end when
the unemployed leaves the labor force
• Some of those who report being unemployed
– May not be trying hard to find a job
• Want to qualify for a government help
• Working but paid “under the table”

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 19
management system for classroom use.
 Identifying Unemployment, Part 11
• Some of those who are out of labor force
– May want to work: discouraged workers
• Discouraged workers
– Individuals who would like to work
– Have given up looking for a job

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 20
management system for classroom use.
 Table 2 Measures of Labor Underutilization
Measure Description Rate
U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian 2.0%
labor force (includes only very long-term unemployed)
U-2 Job losers and persons who have completed temporary jobs, as a 2.3
percent of the civilian labor force (excludes job leavers)
U-3 Total unemployed, as a percent of the civilian labor force (official 4.9
unemployment rate)
U-4 Total unemployed, plus discouraged workers, as a percent of the 5.3
civilian labor force plus discouraged workers
U-5 Total unemployed plus all marginally attached workers, as a percent of 6.2
the civilian labor force plus all marginally attached workers
U-6 Total unemployed, plus all marginally attached workers, plus total 9.9
employed part-time for economic reasons, as a percent of the civilian
labor force plus all marginally attached workers

The table shows various measures of joblessness for the U.S. economy.
The data are for January 2016.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 21
management system for classroom use.
 Identifying Unemployment, Part 12
The Bureau of Labor Statistics defines:
• Marginally attached workers: currently are neither
working nor looking for work but indicate that they
want and are available for a job and have looked for
work sometime in the recent past.
• Discouraged workers: marginally attached workers
who have given a job-market related reason for not
currently looking for a job.
• Persons employed part-time for economic reasons:
want and are available for full-time work but have
had to settle for a part-time schedule.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 22
management system for classroom use.
 Identifying Unemployment, Part 13
• How long are the unemployed without
work?
– Most spells of unemployment are short
– Most unemployment observed at any
given time is long-term
– Most people who become unemployed
• Will soon find jobs

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 23
management system for classroom use.
 Identifying Unemployment, Part 14
• How long are the unemployed without
work?
– Most spells of unemployment are short,
and most unemployment observed at any
given time is long-term
– Most of the economy’s unemployment
problem
• Attributable to the relatively few workers who
are jobless for long periods of time

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 24
management system for classroom use.
 Identifying Unemployment, Part 15
• Unemployment rate
– Never falls to zero
– Fluctuates around the natural rate of
unemployment
• Frictional unemployment
– It takes time for workers to search for the
jobs that best suit their tastes and skills
– Explain relatively short spells of
unemployment
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 25
management system for classroom use.
 Identifying Unemployment, Part 16
• Structural unemployment
– Results because the number of jobs
available in some labor markets
• Is insufficient to provide a job for everyone
who wants one
– Explains longer spells of unemployment
– Results when wages are set above the
equilibrium
• Minimum-wage laws, unions, and efficiency
wages
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 26
management system for classroom use.
 Job Search, Part 1
• Job search
– Process by which workers find appropriate
jobs given their tastes and skills
• Workers differ in their tastes and skills
• Jobs differ in their attributes
• Information about job candidates and job
vacancies is disseminated slowly

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 27
management system for classroom use.
 Job Search, Part 2
• Some frictional unemployment is
inevitable
– Changes in demand for labor among
different firms
– Changes in composition of demand
among industries or regions (sectoral
shifts)
– Changing patterns of international trade
• Workers need to move among industries

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 28
management system for classroom use.
 Job Search, Part 3
• Some frictional unemployment is
inevitable
– The economy is always changing
– From 2004 to 2014, employment
• Fell by 838,000 in construction and 2.1 million
in manufacturing
• Rose by 321,000 in mining, 629,000 in
computer systems design, 1.9 million in food
services, and 2.6 million in health care

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 29
management system for classroom use.
 Public Policy and Job Search, Part 1
• Reduce time for unemployed to find jobs
– Reduce natural rate of unemployment
• Government programs – to facilitate job
search
– Government-run employment agencies
– Public training programs

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 30
management system for classroom use.
 Public Policy and Job Search, Part 2
• Unemployment insurance
– Government program
– Partially protects workers’ incomes
• When they become unemployed
– Increases frictional unemployment
• Without intending to do so
– Qualify – only the unemployed who were
laid off because their previous employers
no longer needed their skills
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 31
management system for classroom use.
 Public Policy and Job Search, Part 3
• Unemployment insurance
– 50% of former wages for 26 weeks
– Reduces the hardship of unemployment
– Increases the amount of unemployment
• Unemployment benefits stop when a worker
takes a new job
• Unemployed
– Devote less effort to job search
– More likely to turn down unattractive job offers
– Less likely to seek guarantees of job security

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 32
management system for classroom use.
 Minimum-Wage Laws, Part 1
• Structural unemployment
– Number of jobs – insufficient
• Minimum-wage laws
– Can cause unemployment
– Forces the wage to remain above the
equilibrium level
• Higher quantity of labor supplied
• Smaller quantity of labor demanded
• Surplus of labor = unemployment

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 33
management system for classroom use.
 Figure 4 Unemployment from a Wage above the
Equilibrium Level

In this labor market, supply and demand are balanced at the wage WE. At this equilibrium wage,
the quantity of labor supplied and the quantity of labor demanded both equal LE.
By contrast, if the wage is forced to remain above the equilibrium level, perhaps because of a
minimum-wage law, the quantity of labor supplied rises to LS and the quantity of labor demanded
falls to LD.
The resulting surplus of labor, LS – LD, represents unemployment.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 34
management system for classroom use.
 Minimum-Wage Laws, Part 2
• Wages may be kept above equilibrium
level
– Minimum-wage laws
– Unions
– Efficiency wages
• If the wage is kept above the equilibrium
level
– Result: unemployment

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 35
management system for classroom use.
 Who earns the minimum wage?, Part 1
• 2014, minimum wage = $7.25 per hour
• 77 million workers – paid at hourly rates
– About half of the labor force
– About 4% reported wages at or below the
prevailing federal minimum
• Thus, the minimum wage directly affects
about 2% of all workers

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 36
management system for classroom use.
 Who earns the minimum wage?, Part 2
• Minimum-wage workers
– Are more likely to be female
– Tend to be young
– Tend to be less educated
– Are more likely to be working part-time
– Over half of all workers paid at or below
the minimum wage were employed in
leisure and hospitality (earn tips)

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 37
management system for classroom use.
 Who earns the minimum wage?, Part 3
• The proportion of hourly paid workers
earning the prevailing federal minimum
wage or less
– Trended downward from 13% in 1979 to
2% in 2006, then increased to 4% in 2014
• Minimum wage increased from $5.15 per
hour in 2006 to $7.25 per hour in 2014

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 38
management system for classroom use.
 Unions & Collective Bargaining, Part 1

• Union
– Worker association
– Bargains with employers over
• Wages, benefits, and working conditions
– Only 11% of U.S. workers today
• About 33% in the 1940s and 1950s
– Type of cartel

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 39
management system for classroom use.
 Unions & Collective Bargaining, Part 2

• Collective bargaining
– Process by which unions and firms agree on
the terms of employment
• Strike
– Organized withdrawal of labor from a firm by
a union
– Reduces production, sales, and profit
• Union workers
– Earn 10-20% more than similar workers who
do not belong to unions
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 40
management system for classroom use.
 Unions & Collective Bargaining, Part 3

• Union – raises the wage above the

equilibrium level
– Higher quantity of labor supplied
– Smaller quantity of labor demanded
– Unemployment
– Better off: employed workers (insiders)
– Worse off: unemployed (outsiders)
• May stay unemployed
• Take jobs in firms that are not unionized

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 41
management system for classroom use.
 Unions & Collective Bargaining, Part 4

• Union – raises wage above

equilibrium
– Supply of labor in industries
not unionized will increase,
lower wages
• Workers in unions
– Reap the benefit of “Gentlemen, nothing
stands in the way of a
collective bargaining final accord except that
• Workers not in unions management wants
profit maximization and
– Bear some of the cost the union wants more
moola.”

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 42
management system for classroom use.
 Unions & Collective Bargaining, Part 5

• Are unions good or bad for the economy?

– Critics
• Unions – a type of cartel
• Allocation of labor
– Inefficient – high union wages reduce
employment in unionized firms below
the efficient level
– Inequitable – some workers benefit at
the expense of other workers

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 43
management system for classroom use.
 Unions & Collective Bargaining, Part 6

• Are unions good or bad for the economy?

– Advocates
• Unions – necessary antidote to the market
power of the firms that hire workers
– In the absence of a union, firms pay
lower wages and offer worse working
conditions
• Unions – help firms respond efficiently to
workers’ concerns
– Keep a happy and productive workforce
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 44
management system for classroom use.
 Theory of Efficiency Wages, Part 1
• Efficiency wages
– Above-equilibrium wages paid by firms to
increase worker productivity
• Worker health; Worker turnover
• Worker quality; Worker effort

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 45
management system for classroom use.
 Theory of Efficiency Wages, Part 2
• Worker health
– Better paid workers
• Eat a more nutritious diet
• Healthier and more productive
• Worker turnover
– Firm – can reduce turnover among its
workers
• By paying them a high wage

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 46
management system for classroom use.
 Theory of Efficiency Wages, Part 3
• Worker quality
– Firm – pays a high wage
• Attracts a better pool of workers
• Increases the quality of its workforce
• Worker effort
– High wages – make workers more eager
to keep their jobs
• Give workers an incentive to put forward their
best effort

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 47
management system for classroom use.
 Henry Ford and the very generous
$5-a-day wag, Part 1
• Henry Ford, founder of Ford Motor
Company
– Introduced modern techniques of
production
– Built cars on assembly lines
• Unskilled workers were taught to perform the
same simple tasks over and over again
– Output: Model T Ford

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 48
management system for classroom use.
 Henry Ford and the very generous
$5-a-day wage, Part 2
• 1914, Ford: the $5 workday
– Twice the going wage
– Long lines of job seekers
• Number of workers willing to work > number
of workers Ford needed
• Ford’s high-wage policy: efficiency wage

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 49
management system for classroom use.
 Henry Ford and the very generous
$5-a-day wage, Part 3
• Ford’s efficiency wage
– Turnover fell
– Absenteeism fell
– Productivity rose
– Workers – so much more efficient
• Ford’s production costs were lower despite
higher wages
– Profitable for the firm

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 50
management system for classroom use.
 Henry Ford and the very generous
$5-a-day wage, Part 4
• Ford’s efficiency wage
– High worker effort
– Closely linked to Ford’s use of the
assembly line
• Assembly line – highly interdependent
workers

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 51
management system for classroom use.